In April, the Crypto Assets Regulatory Working Group (CAR WG), which resorts under the Intergovernmental Fintech Working Group (IFWG) and whose members include the National Treasury, South African Reserve Bank and Prudential Authority, FSCA, Financial Intelligence Centre, National Credit Regulator and South African Revenue Services, published a position paper that made various recommendations in respect of the regulation of cryptoassets.

The draft Declaration is meant to give effect to some of the recommendations in the position paper by declaring that cryptoassets are financial products under the FAIS Act.

"The Declaration would have the effect that any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider, and must comply with the requirements of the FAIS Act. This will include crypto asset exchanges and platforms, as well as brokers and advisors," the FSCA said.

The FSCA said that the draft Declaration should improve disclosures to customers that show the risks involved in investing in cryptoassets better and it should also ensure that a more robust advice process is adopted when intermediaries advise customers to buy cryptoassets.

In addition, the licensing of intermediaries is also needed to improve the quality of data for policymakers and regulators about the crypto space and to determine whether further regulation is required.

"The draft Declaration in no way impacts the status of crypto assets in the context of other laws such as exchange control regulations, requirements under the Pension Funds Act and Collective Investment Schemes Act and so forth, nor does it attempt to regulate, legitimise or give credence to crypto assets. The draft Declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment pending the outcome of broader developments currently taking place through the CAR WG which will inform future policy interventions to be implemented across a variety of regulators and laws," the FSCA said.

The consultation is a product of the Intergovernmental FinTech Working Group (IFWG), which includes members from Treasury and the SARB, which was formed to put together recommendations to regulate digital assets in South Africa.

The paper focuses on two uses cases, namely the purchasing and selling of cryptoassets and paying for goods and services with them, with further use cases to be addressed in future policy documents.

The SARB proposes that South Africa moves to a level of "limited regulations", which it also calls a "'limited regulatory' framework".

"At this proposed level, an official body places specific requirements on providers of certain services in respect of cryptoassets, without setting predefined conditions for formal authorisation to provide cryptoassets-related products or services," SARB said.

Currently, South Africa does not currently intend to ban the "buying, selling or holding of cryptoassets" or to ban them for payments.

However, since cryptoassets are not recognised currency, customers may be exposed to harm in a unregulated environment.

The SARB said:

"The decision not to ban the use of cryptoassets is, however, based on the existing landscape and current levels of adoption, acceptance and use. South African authorities, therefore, reserve the right to amend their policy stance should cryptoassets pose a material risk to their respective regulatory mandates."

The central bank recommends that cryptoassets remain without legal tender and are not recognised as electronic money either.

The SARB suggests that a “useful starting point for regulatory intervention” at this stage would be to introduce a registration scheme for cryptoasset service providers such as trading platforms, custodians and digital wallet and payment service providers.

"The phased approach, starting with the registration requirement, could lead to formal authorisation and designation as a registered/licensed provider for cryptoasset services operating in South Africa at a later stage," the bank added.

The Details of the registration requirements will be published later on this year, with this first phase expected to be implemented by the first quarter of 2019 and the subsequent phases to follow.

Registered cryptoasset service providers will be required to comply with anti-money laundering and combatting financing of terrorism requirements, including: ongoing monitoring, keeping records and reporting suspicious and unusual transactions, cash transactions of R25,000 and above and of control of property that is linked to terrorist activity or organisations.

The bank also proposes to continue monitoring cryptoassets, with a specific focus on monitoring:

• the overall market capitalisation of cryptoassets;
• cryptoasset trading platforms domiciled in South Africa through reporting;
• the cryptoasset payment service providers and the number of merchants/retailers accepting cryptoassets as payment in South Africa and internationally; and
• the volume of cryptoassets bought and sold via cryptoasset vending machines.